Those weak conditions and relatively low interest rates elsewhere, and recent gains in export prices, were underpinning the kiwi dollar’s strength which was leaning against domestic inflation, Wheeler said.
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Economists also said the central bank had been unlikely to cut on Thursday after the economy grew at its fastest clip in two years and dairy prices have pushed higher over August.,.
“One can only assume that the RBNZ intends reducing the cash rate by 25 points to 1.75 percent when it delivers its November 10 Monetary Policy Statement”, he said.
“The trade-weighted exchange rate is higher than assumed in the August Statement”. Fragilities in the global economy remain, dampening inflation pressures, strong NZD, the domestic economy is performing well, housing continues to be a financial stability concern, and while inflation is likely to accelerate, low inflation expectations continue to be risk and a concern.
The Fed’s decision is key for Wheeler because low United States interest rates have sapped demand for the greenback, making the kiwi dollar stronger, reducing New Zealand’s imported costs and dragging down headline inflation. Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies.
Wheeler said headline inflation was being held below the bank’s 1-3% target band by continuing deflation in tradables inflation, which is related to prices set on global markets. There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence.
He said, however, that while long-term inflation expectations are well-anchored at 2 per cent “the sustained weakness in headline inflation risks further declines in inflation expectations”. “We will continue to watch closely the emerging economic data”, the RBNZ said in its official statement.
First NZ economist Chris Green said he saw two more OCR cuts, with one each in November and February.
The New Zealand dollar rose after the US Federal Reserve held off raising interest rates while keeping alive the possibility of a hike later this year, the Bank of Japan changed its policy focus to longer-term rates, and ahead of this morning’s Reserve Bank policy review.
Westpac senior economist Satish Ranchhod said the Reserve Bank had clearly stuck to the script with this call.
Analysts have picked November, when the central bank will have more information about inflation.
Though undoubtedly a dovish monetary policy statement, outside of the tweak towards housing, it was very much the same view communicated from the RBNZ a month earlier.
It is a situation where the OCR is biased lower as the central bank makes an effort to react to the things it cannot control by over-stimulating the things it can, according to ANZ.
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“The broad factors shaping the monetary policy outlook are unchanged from what the Reserve Bank had already signalled”.
